The market is moving very quickly. I can’t say that there’s one aspect that we’re looking at, but one thing I will tell you that I do believe is that we’re a Tweet away from—fill in the blank. It’s just the world that we’re living in at this point.
So, what we’re trying to do, in essence, is protect against the tails. Because what is the role of a municipal bond portfolio? At the end of the day, it’s to provide income, preserve capital, and dampen volatility.
So, what you do is you look at what the market’s offering you. What is the market telling you? So, for example, if municipals are expensive relative to Treasuries at various points in time, why not offlay some of that risk into US Treasuries? These are things that we’re looking at. What is the market giving you? What is it telling you?
There’s a time and a place for every investment. So, for example, municipal credit, meaning a single-A-rated bond, mid-grade bonds or even high-yield bonds. There’s a time and a place for those types of bonds. And over the last number of years, it has been that time and that place as the US economy has been expanding, tax revenues have been coming in hand over fist, we have reserve funds, cash-funded reserve funds, that are at their highest levels ever. And it’s been recognized by rating agencies and over the last three or four years, upgrades have outpaced downgrades by two to one.
So when we look forward and we say, yes, it is time to own credit still. The economy continues to expand. We’re not expecting a recession in the United States in the near term. So, in that regard, own credit—but be careful. Know what you’re buying. And we think that security selection in this environment is so much more important. If you’re not getting paid the same today to take the same risk you were taking yesterday, why take that risk? Or, you have to be careful in taking that same risk.
And it always gets back to those three tenants: to provide income, preserve capital, and dampen volatility.
Daryl Clements is Portfolio Manager—Municipal Bonds at AllianceBernstein.
The views expressed herein do not constitute research, investment advice or trade recommendations, do not necessarily represent the views of all AB portfolio-management teams, and are subject to revision over time.